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Commercial real estate may provide consistent earnings, contribute to business development, or establish long-term value. However, all commercial real estate transactions involve some degree of risk and expense. Utilizing the correct financing option will help ensure that your commercial real estate venture stays focused and moving forward.
Knowing what the main commercial real estate loans types are will help you make a more informed choice about which lender would be best for your needs and finance options that align with your business goals.
Match the Loan to the Job
Prior to comparing interest rates, determine exactly what you are going to use the funds for. If you plan on purchasing a home, it will most likely require a separate loan than if you were going to do some remodeling or build a brand new structure.
Financing a Property Purchase
The traditional commercial mortgage is a popular option when purchasing business real estate such as office buildings, retail space, warehouse facilities, etc., where the property will be used to generate revenue. In most cases, the property serves as collateral. Commercial lenders will evaluate the borrower’s financial position (credit), financial resources (funds available) and potential revenue from the property.
Supporting an Owner-Operated Business
Small business administration loans can assist qualifying small businesses in acquiring or improving real estate that is used by the business itself.
- SBA 7(a) loans can fund real estate and other approved business costs.
- SBA 504 loans are meant to help finance large-scale fixed asset purchases (e.g., commercial real estate/land).
Borrowers should review these programs’ requirements to determine if they meet the criteria prior to submitting an application.
Moving Quickly on a Deal
A short-term bridge loan can be used by an investor/buyer who needs to complete their purchase rapidly or who plans on refinancing the property at a later date. A bridge loan could also be used to make necessary repairs/upgrades to the property so that it will be eligible for longer term financing.
Bridge loan costs may exceed those of conventional mortgage options, so you will need a clear strategy for paying off the loan or getting a new one.
Building or Renovating
Construction Loans Can Assist With Funding New Buildings Or Significant Improvements To Existing Structures. In addition, the funds from construction loans are typically provided in increments based upon the progress of the project. Finally, lenders will typically request documentation including plans, permits, budgets, and information about the general contractor.
Using Property as the Main Security
Hard money loans place a great deal of emphasis on how much the property being offered as collateral is worth. Hard money loans can be advantageous when working under strict deadlines, however; these types of loans tend to have higher interest rates and shorter repayment periods.
Compare the Full Cost
When you compare the different commercial real estate loans types, you should look at:
Make the Loan Fit the Strategy
The financing options you have will depend on what type of property you want to buy, the amount of money you require to operate your business, and if you are able to repay the loan. It is essential to review each of the proposals offered to you. When you come across terms in a proposal that you do not understand, contact the lender for further explanation. A financing option that suits your needs can help preserve your working capital, and at the same time, assist you in reaching your long-term goals for the property.
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